Comments on: Art, venture capital, and down-round phobia http://blogs.reuters.com/felix-salmon/2013/07/16/art-venture-capital-and-down-round-phobia/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: tisunion http://blogs.reuters.com/felix-salmon/2013/07/16/art-venture-capital-and-down-round-phobia/comment-page-1/#comment-47694 Mon, 22 Jul 2013 09:12:28 +0000 https://blogs.reuters.com/felix-salmon/?p=22257#comment-47694 Nice sharing.

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By: Anonymous http://blogs.reuters.com/felix-salmon/2013/07/16/art-venture-capital-and-down-round-phobia/comment-page-1/#comment-47693 Mon, 22 Jul 2013 09:01:04 +0000 https://blogs.reuters.com/felix-salmon/?p=22257#comment-47693 With uniquely tailored business model, efficient matchmaking capabilities, and innovative sourcing solutions, businesses around the world, all members on Tisunion are sure to benefit from its comprehensive service, especially investment service in China it offers.

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By: dsquared http://blogs.reuters.com/felix-salmon/2013/07/16/art-venture-capital-and-down-round-phobia/comment-page-1/#comment-47659 Wed, 17 Jul 2013 05:56:14 +0000 https://blogs.reuters.com/felix-salmon/?p=22257#comment-47659 the thing that lets you know that anecdote is not “literally true” is that it is alleging that someone was at Basel Art Miami who used the phrase “never have to work again”, thus suggesting that they were familiar with the concept “having to work”.

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By: realist50 http://blogs.reuters.com/felix-salmon/2013/07/16/art-venture-capital-and-down-round-phobia/comment-page-1/#comment-47656 Tue, 16 Jul 2013 20:38:36 +0000 https://blogs.reuters.com/felix-salmon/?p=22257#comment-47656 One other thought about Horowitz’s column.

For reasons of either brevity, simplicity, or self-interest, he fails to mention one reason that a down round is such a mess in VC deals. As I said in my other comment, most VC fundings are structured as convertible preferred, so convertible into common at some conversion price. It is also normal that this conversion price is adjusted downward – i.e., the convertible preferred owns more of the company – if the company ever sells common (or securities convertible into common) at a lower price. Different deals have different ways to calculate of this “ratchet”, some more dilutive than others.

The point is, however, that a down round can crush common shareholders – a group that includes the Company’s founders and employees – due to dilution. That’s particularly likely to be true if the company has raised multiple rounds – let’s say it has issued Series A, Series B, and Series C Preferreds – in which a case a meaningfully down Series D round can be massively dilutive.

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By: realist50 http://blogs.reuters.com/felix-salmon/2013/07/16/art-venture-capital-and-down-round-phobia/comment-page-1/#comment-47655 Tue, 16 Jul 2013 20:27:00 +0000 https://blogs.reuters.com/felix-salmon/?p=22257#comment-47655 I think that this analogy is interesting.

The other issue with VC round valuations is that they are, to some significant degree, BS in the first place.

The reason is that, in a typical VC deal, the VC invests in preferred security of some sort. Details vary, but a typical structure is preferred stock that’s convertible into common stock at a fixed price, has a liquidation preference equal to the investment amount, may have an accruing dividend on top of that, and has some mechanism for forced conversion of the security upon a liquidity event (IPO or sale) above a certain valuation (often the initial conversion price, sometimes higher).

So, in a Series A, for example, say that $10 million is invested. Assume that all other shares are common stock, which is a reasonable assumption. If that $10 million of Series A Preferred Stock is convertible into 20% of the total fully-diluted shares of common stock, someone will say that the post-money valuation is $50 million ($10 million divided by 20%). As I say, there’s a large amount of BS to that, because it says that a highly-structured security with more rights than common stock, and economic advantages in low-value exit scenarios, is worth no more than the common stock into which its convertible. That’s not true: the common is worth some amount less, though the discount is hard to quantify. Since the common is worth less, the company is worth less than the reported $50 million post-money valuation.

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